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Essays on macroeconomic implications of the labour market

Dennery, Charles (2018) Essays on macroeconomic implications of the labour market. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.74gusgx6zj5c


This thesis examines some features of the labour market, and their macroeconomic consequences. The first paper relates the observed flatter Phillips Curve to the rise in labour turnover and temporary employment. In a New Keynesian model of sticky wages, workers or unions discount future wage income with a low discount factor if there is a strong flow of job turnover. In the New Keynesian wage Phillips Curve, this implies that future inflation is discounted more heavily than without job turnover. In the long run, the Phillips Curve is much flatter, and is no longer vertical or near-vertical; in the middle and long run, the curve appears flatter as turnover creates a bias if it is not accounted for. The second paper studies the impact of a rise in monopsony in the labour market: wages are set by employers instead of workers/unions. If rigid wages are set by monopsonistic employers and there is inflation, the fall in the real wage lowers the labour supply. In such a world, inflation is contractionary: the Phillips curve is inverted. The paper then examines a model where employers and employees both have market power, and use it to bargain over wages. The slope of the bargained Phillips Curve depends on each side’s relative power. An increase in employers’ power flattens the Phillips Curve. The last paper accounts for the possibility of featherbedding (or overmanning) in the labour market. In such a case, unions are able to impose a level of employment above the firm’s optimum. In other words, the wage is above the worker’s marginal rate of substitution, and above the firm’s marginal product of labour. In this case labour market rigidities act as a distortionary tax on profits rather than employment; this generates a different source of inefficiency. While these distortions are very costly in the long run, removing them can be detrimental to employment in the short run.

Item Type: Thesis (PhD)
Additional Information: © 2018 Charles Dennery
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Supervisor: Benigno, Gianluca

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